1997
Annual Report
ARMATRON INTERNATIONAL INC.
/
/ ARMATRON INTERNATIONAL, INC. AND SUBSIDIARY
- ----------------------------------------------
FINANCIAL HIGHLIGHTS
Years Ended September 30,
1997 1996 1995
- --------------------------------------------------------------------------------------
Net Sales $13,314,000 $13,750,000 $12,017,000
- --------------------------------------------------------------------------------------
Operating Profit (Loss) $ (244,000) $ 9,000 $(1,159,000)
- ---------------------------------------------------------------------------------------
Net Loss $ (286,000) $ (495,000) $(1,557,000)
- ---------------------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding 2,459,749 2,459,749 2,459,749
- ---------------------------------------------------------------------------------------
Loss Per Share of Common Stock:
Net Loss $ (.12) $ (.20) $ (.63)
=========================================
- ---------------------------------------------------------------------------------------
TO OUR STOCKHOLDERS
The economic challenges of the consolidation and closings in the
retail industry has heightened the competitive marketplace. While we maintained
the sales position in the lawn and garden segment, we experienced a decrease in
the industrial products sector. Sales declined from $13,750,000 to $13,314,000
with a consolidated loss of $286,000 as compared to a loss of $495,000 for the
prior fiscal year.
As I advised in my last letter, Federal Express installed Echovision
systems on all new pick-up and delivery vans from January 1, 1996 through the
end of November and after a comprehensive six-month evaluation approved the
continuation of the program for all new pick-up and delivery vans starting in
July 1997. Additional testing programs are in process with a number of other
major fleet operators and we anticipate similar results during this fiscal
period.
Expanded product offerings in the lawn and garden market is increasing
our retailing penetration and will afford the opportunity for a larger market
share.
Mr. Craig Spangenberg, a member of the Board of Directors since 1981,
will not stand for reelection this year. His dedicated service during his
tenure is greatly appreciated and we all wish him well.
The challenges will not diminish in the coming year and while we
continue to experience pricing pressure in the lawn and garden market, the
expanding product offerings and increasing market penetration together with the
increasing Echovision potential should return the Company to profitability.
The continuing support and understanding exhibited by our employees
and stockholders is greatly appreciated and will bode well in renewing the
Company's growth plans.
/s/ CHARLES J. HOUSMAN
Charles J. Housman
President & Chairman of the Board
/
/ ARMATRON INTERNATIONAL, INC. AND SUBSIDIARY
- ----------------------------------------------
ASSETS
September 30,
1997 1996
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 1,126,000 $ 1,849,000
Trade accounts receivable (less allowance for doubtful
accounts of $116,000 in 1997 and $176,000 in 1996)............ 2,389,000 2,121,000
Inventories.................................................... 2,711,000 2,349,000
Deferred taxes................................................. 113,000 130,000
Prepaid and other current assets............................... 165,000 187,000
--------------------------
Total Current Assets ...................................... 6,504,000 6,636,000
PROPERTY AND EQUIPMENT , net .................................. 589,000 637,000
OTHER ASSETS ................................................... 171,000 202,000
--------------------------
$ 7,264,000 $ 7,475,000
==========================
The accompanying notes are an integral part of the
consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
September 30,
1997 1996
CURRENT LIABILITIES:
Accounts payable............................................. $ 695,000 $ 1,171,000
Other current liabilities.................................... 1,825,000 1,304,000
Current portion under capital lease obligations.............. 18,000 --
--------------------------
Total Current Liabilities ............................... 2,538,000 2,475,000
--------------------------
LONG-TERM DEBT, related parties................................ 4,715,000 4,715,000
--------------------------
LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current portion.... 30,000 --
--------------------------
DEFERRED RENT, net of current portion ......................... 38,000 56,000
--------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, par value $1 per share; 6,000,000 shares
authorized; 2,606,481 shares issued at September 30, 1997
and 1996.................................................... 2,606,000 2,606,000
Additional paid-in capital................................... 6,770,000 6,770,000
Accumulated deficit.......................................... (9,047,000) (8,761,000)
--------------------------
329,000 615,000
Less: Treasury stock at cost--146,732 at September 30, 1997
and 1996...................................................... 386,000 386,000
--------------------------
Total Stockholders' Equity (Deficiency) ................. (57,000) 229,000
--------------------------
Total Liabilities and Stockholders' Equity (Deficiency).. $ 7,264,000 $ 7,475,000
==========================
The accompanying notes are an integral part of the
consolidated financial statements.
/
/ ARMATRON INTERNATIONAL, INC. AND SUBSIDIARY
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STATEMENTS OF CONSOLIDATED OPERATIONS
For the Years Ended September 30, 1997, 1996 and 1995
1997 1996 1995
Net Sales ............................................. $ 13,314,000 $ 13,750,000 $ 12,017,000
Cost of products sold.................................. 11,126,000 11,054,000 10,570,000
--------------------------------------------
Gross margin........................................... 2,188,000 2,696,000 1,447,000
Selling, general and administrative expenses........... 2,492,000 2,625,000 2,541,000
Provision for (recovery of) bad debts.................. (60,000) 62,000 65,000
--------------------------------------------
Operating Profit (Loss) ............................... (244,000) 9,000 (1,159,000)
--------------------------------------------
Other Income (Expense):
Interest expense--third parties........................ (57,000) (49,000) (41,000)
Interest expense--related parties...................... (478,000) (480,000) (488,000)
Interest income........................................ 62,000 57,000 72,000
Unusual item........................................... 450,000 -- --
Other income (expense)................................. (2,000) 3,000 59,000
--------------------------------------------
Other income (expense)--net............................ (25,000) (469,000) (398,000)
--------------------------------------------
Loss before income taxes .............................. (269,000) (460,000) (1,557,000)
Provision for income taxes............................. 17,000 35,000 --
--------------------------------------------
Net Loss .............................................. $ (286,000) $ (495,000) $ (1,557,000)
============================================
Net Loss per Share of Common Stock .................... $ (0.12) $ (0.20) $ (0.63)
============================================
Weighted Average Number of Common Shares Outstanding... 2,459,749 2,459,749 2,459,749
============================================
The accompanying notes are an integral part of the
consolidated financial statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Years Ended September 30, 1997, 1996 and 1995
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................. $ (286,000) $ (495,000) $ (1,557,000)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization.......................... 333,000 395,000 453,000
Amortization of deferred rent.......................... (18,000) -- --
Deferred taxes......................................... 17,000 35,000 --
Provision (recovery) for bad debts..................... (60,000) 62,000 65,000
Loss on disposal of equipment.......................... -- 1,000 --
Unusual item........................................... (450,000) -- --
Changes in operating assets and liabilities:
Accounts receivable.................................... (208,000) 6,000 160,000
Inventories............................................ (362,000) (124,000) 712,000
Prepaid and other current assets....................... 64,000 (26,000) 144,000
Other assets........................................... (18,000) 9,000 (32,000)
Accounts payable....................................... (476,000) 59,000 (275,000)
Other current liabilities.............................. 520,000 580,000 (85,000)
Deferred rent.......................................... -- 75,000 --
------------------------------------------
Net cash flow from (used for) operating activities... (944,000) 577,000 (415,000)
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment.......................... 2,000 -- --
Payments for machinery and equipment..................... (222,000) (50,000) (780,000)
Proceeds from sale of former subsidiary ................. 450,000 -- --
------------------------------------------
Net cash flow from (used for) investing activities... 230,000 (50,000) (780,000)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.................... (9,000) -- --
Payments on long-term debt--third parties................ -- -- (1,000)
Payments on long-term debt--related parties.............. -- -- (425,000)
Loan origination costs................................... -- -- (63,000)
------------------------------------------
Net cash flow used for financing activities.......... (9,000) -- (489,000)
------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...... (723,000) 527,000 (1,684,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............ 1,849,000 1,322,000 3,006,000
------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................. $ 1,126,000 $ 1,849,000 $ 1,322,000
==========================================
The accompanying notes are an integral part of the
consolidated financial statements.
/
/ ARMATRON INTERNATIONAL, INC. AND SUBSIDIARY
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Total
Common Stock Treasury Stock Stockholders'
---------------------- Paid-In Accumulated --------------------- Equity
Shares Amount Capital Deficit Shares Amount (Deficiency)
--------- ---------- ---------- ----------- --------- --------- -------------
Balance, September 30, 1994 ..... 2,606,481 $2,606,000 $6,770,000 $(6,709,000) (146,727) $(386,000) $ 2,281,000
Increase in treasury stock....... -- -- -- -- (5) -- --
Net loss......................... -- -- -- (1,557,000) -- -- (1,557,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 ..... 2,606,481 2,606,000 6,770,000 (8,266,000) (146,732) (386,000) 724,000
Net loss......................... -- -- -- (495,000) -- -- (495,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 ..... 2,606,481 2,606,000 6,770,000 (8,761,000) (146,732) (386,000) 229,000
Net loss......................... -- -- -- (286,000) -- -- (286,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 ..... 2,606,481 $2,606,000 $6,770,000 $(9,047,000) (146,732) $(386,000) $ (57,000)
===========================================================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
The Company operates principally in two segments, the Consumer Products
segment and the Industrial Products segment. Operations in the Consumer
Products segment involve the manufacture and distribution of Flowtron
leafeaters, bugkillers, yard carts, storage sheds and dog houses which
comprised 97% and 94% of the Company's sales for the years ended September
30, 1997 and 1996, respectively. The Company distributes its consumer
products primarily to major retailers throughout the United States, with
some products distributed under customer labels. Substantially all of this
segment's sales and accounts receivable related to business activities with
such retailers. The Industrial Products segment markets electronic obstacle
avoidance systems for transportation and automotive applications. Production
of these systems began in fiscal 1996. There are no intercompany sales
between segments.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Armatron
International, Inc. and its wholly owned subsidiary. All intercompany
balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to prior year amounts to conform with the
current year presentation.
Revenue Recognition
Revenue from product sales is recognized at the time the products are
shipped. Following industry trade practice, the Company offers extended
payment terms for delivery of seasonal items.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of less than three months to be cash equivalents. The
Company invests excess funds in short-term, interest-bearing obligations,
including reverse repurchase agreements and commercial paper.
The Company has no requirements for compensating balances. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
Federally insured limits and in deposit accounts at its commercial finance
company. The Company has not experienced any losses in such accounts. The
Company believes it is not exposed to any significant credit risk on cash
and cash equivalents.
Inventories
Inventories are stated on a first-in, first-out (FIFO) basis at the lower of
cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed based
upon the estimated useful lives of the various assets using the straight-
line method with annual rates of depreciation of 10 to 33-1/3%. Capitalized
tooling costs are amortized over three years. Leasehold improvements are
amortized over the lesser of the term of the lease or the estimated useful
life of the related assets. Tooling and molding costs are charged to a
deferred cost account as incurred, prepaid tooling, until the tool or mold
is completed. Upon completion the costs are transferred to a property/
equipment account. Depreciation expense was $325,000, $363,000 and $426,000
for fiscal 1997, 1996 and 1995, respectively. Maintenance and repairs are
charged to operations as incurred. Renewals and betterments which materially
extend the life of assets are capitalized and depreciated. Upon disposal,
the asset cost and related accumulated depreciation are removed from their
respective accounts. Any resulting gain or loss is reflected in earnings.
Deferred Rent
Deferred rent results from amortizing the lease related to the Company's
operating facility over the term of the lease on a straight-line basis.
Advertising
The Company expenses advertising as incurred. Advertising expense was
$213,000, $322,000 and $295,000 for fiscal 1997, 1996 and 1995,
respectively.
Income Taxes
Deferred income taxes are provided for temporary differences between
financial statement and income tax reporting principally from the
carryforward of unused net operating losses, tax credits, and alternative
minimum taxes.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents and long-term debt
approximate their fair value based on instruments with similar terms and
maturities.
Use of Estimates
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings (Loss) Per Share
Earnings (loss) per share of common stock is computed on the basis of
weighted average number of common shares outstanding in each year.
3. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade accounts
receivable. If any of the Company's major customers fail to pay the Company
on a timely basis, it could have a material adverse effect on the Company's
business, financial condition and results of operations.
For the year ended September 30, 1997, two customers accounted for
approximately 42% of the Company's net sales. At September 30, 1997, these
customers accounted for approximately 57% of the Company's trade accounts
receivable balance.
For the year ended September 30, 1996, a single customer accounted for
approximately 18% of the Company's net sales. At September 30, 1996, this
customer accounted for approximately 33% of the Company's trade accounts
receivable balance.
The Company's export sales are not significant.
4. SUPPLEMENTAL CASH FLOW INFORMATION
The Company's cash payments for interest and income taxes and the Company's
non-cash investing and financing activities for the years ended September
30, 1997, 1996 and 1995 were as follows:
1997 1996 1995
Interest - related parties.......................... $ -- $49,000 $ 41,000
Interest - third parties............................ $57,000 $41,000 $528,000
Income taxes........................................ $ -- $ -- $ --
Non-cash investing and financing activities:
Capital expenditures financed by capital lease.... $57,000 $ -- $ --
5. MAJOR SUPPLIERS
The Company currently purchases its plastic storage sheds, yard carts and
dog houses from one supplier. This supplier manufactures these products in
accordance with the Company's designs and specifications. The Company
believes that other suppliers could provide the required products although
comparable terms may not be realized. A change in suppliers could cause a
delay in scheduled deliveries of the products to the Company's customers and
a possible loss of revenue, which would adversely affect the Company's
results of operations.
6. INVENTORIES
Inventories consisted of the following at September 30:
1997 1996
Raw Material, primarily purchased components....... $1,680,000 $1,632,000
Work in Process.................................... 21,000 65,000
Finished Goods..................................... 1,010,000 652,000
-----------------------
$2,711,000 $2,349,000
=======================
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
1997 1996
Leasehold improvements.............................. $ 149,000 $ 80,000
Furniture and fixtures.............................. 396,000 396,000
Machinery and equipment ............................ 1,828,000 1,830,000
Capitalized tooling cost............................ 3,980,000 3,808,000
------------------------
6,353,000 6,114,000
Less accumulated depreciation and amortization...... 5,764,000 5,477,000
------------------------
$ 589,000 $ 637,000
========================
8. OTHER ASSETS
Other assets consisted of the following at September 30:
1997 1996
Other receivable, net of current portion.................. $ 64,000 $ 89,000
Note receivable--employee, due under terms of an annual
renewal note, interest payable monthly at an annual rate
of 6%, secured by a second mortgage...................... 100,000 100,000
Other..................................................... 7,000 13,000
-------------------
$171,000 $202,000
===================
9. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following at September 30:
1997 1996
Salaries, commissions and benefits...... $ 399,000 $ 365,000
Sales allowances and incentives......... 163,000 --
Professional fees....................... 78,000 79,000
Warranty costs.......................... 37,000 40,000
Advertising costs....................... 82,000 145,000
Interest, due to related parties........ 917,000 439,000
Other................................... 149,000 236,000
-----------------------
$1,825,000 $1,304,000
=======================
10. DEBT
Long-term debt
The Company has a $7,000,000 line of credit with a realty trust operated for
the benefit of the Company's principal shareholders. This line of credit,
with interest at 10%, requires monthly payments of interest only, and is
collateralized by all assets of the Company. In August 1997, the Company
renewed this line of credit with the realty trust under the same terms and
conditions and extended the maturity date to October 1, 1998 therefore this
line of credit has been classified as long-term on the accompanying balance
sheet. The Company had $4,715,000 outstanding under this line of credit at
September 30, 1997 and 1996. Repayment of this line of credit is subordinate
to the repayment of any and all balances outstanding on the revolving line
of credit from a commercial finance company which is further described
below. Related interest expense incurred in the years ended September 30,
1997, 1996 and 1995 was $478,000, $480,000 and $488,000. At September 30,
1997, interest payments of $917,000 associated with this line were in
arrears for the period November 1, 1995 to September 30, 1997. On November
26, 1997 the Company received a waiver for the covenant violation related to
the interest payments. The period of this waiver extends through October 1,
1998.
Note Payable
The Company has a revolving line of credit agreement with a commercial
finance company which permits combined borrowings up to $3,500,000 in cash
and letters of credit. This credit agreement is collateralized by all assets
of the Company and expires in December 1999. The terms of this agreement
include a borrowing limit which fluctuates depending on the levels of
accounts receivable and inventory which collateralize the borrowings. The
agreement contains various covenants pertaining to maintenance of working
capital, net worth and other conditions. Interest on amounts outstanding is
payable on a monthly basis at an annual rate of 1 3/4% over the commercial
base rate. The commercial base rate was 8.5% at September 30, 1997. At
September 30, 1997, the Company had outstanding letters of credit amounting
to $175,000 and approximately $2,359,000 was available, pursuant to the
borrowing formula, under this credit agreement.
A summary of borrowings on commercial finance company and bank revolving
credit agreements and unused lines of credit for the years ended September
30, 1997, 1996, and 1995 were as follows:
1997 1996 1995
Average borrowings during the year $ 96,000 $ 313,638 $ 394,129
Average interest rate during the year 10.25% 10.67% 11.25%
Maximum borrowings during the year $ 912,000 $1,365,000 $1,330,000
Unused line of credit at September 30 $3,283,000 $3,169,000 $3,354,000
11. STOCK OPTIONS
The Company's incentive stock option plan terminated December 1, 1990.
Options were granted to officers and key employees to purchase common shares
at prices not less than the fair market value on the date of grant. Options
are exercisable in varying installments and expire in varying periods which
may not exceed ten years from the date of the grant.
Information concerning stock options for the years ended September 30, 1997,
1996 and 1995 is summarized below:
Options Outstanding
Shares Price Range
September 30, 1994................ 20,000 $1.75--$2.50
Granted......................... -- --
Exercised....................... -- --
Canceled........................ -- --
------------------------
September 30, 1995................ 20,000 $1.75--$2.50
Granted......................... -- --
Exercised....................... -- --
Canceled........................ -- --
------------------------
September 30, 1996................ 20,000 $1.75--$2.50
Granted......................... -- --
Exercised....................... -- --
Canceled........................ -- --
------------------------
September 30, 1997 ............... 20,000 $1.75--$2.50
========================
At September 30, 1997 and 1996, options for 20,000 shares were exercisable.
The expiration dates of the options range from 1998 to 1999. The average
exercise price of outstanding options is $2.27.
12. INCOME TAXES
The provision for income taxes consists of the following:
(000's)
Year Ended September 30,
1997 996 1995
CURRENT TAX PROVISION
Federal............................. $ -- $ -- $ --
State............................... -- -- --
------------------------
TOTAL CURRENT PROVISION............... -- -- --
------------------------
DEFERRED TAX (BENEFIT)/EXPENSE
Federal............................. 201 (160) (545)
State............................... 137 (39) (297)
------------------------
TOTAL DEFERRED (BENEFIT)/EXPENSE...... 338 (199) (842)
CHANGE IN VALUATION ALLOWANCE......... (321) 234 842
------------------------
INCOME TAXES (BENEFIT)/EXPENSE........ $ 17 $ 35 $ --
========================
The significant items comprising the deferred tax assets and liabilities
are as follows at September 30:
1997 1996
Deferred Tax Assets:
Doubtful receivables....................... $ 51,000 $ 78,000
Inventory obsolescence and shrinkage....... 235,000 225,000
Sales allowances........................... 46,000 32,000
Warranties................................. 17,000 18,000
Non-qualified executive retirement plan.... 147,000 147,000
Tax loss carryforwards..................... 6,620,000 6,595,000
Tax credit carryforwards................... 268,000 439,000
Other...................................... 0 215,000
-------------------------
Subtotal................................. 7,384,000 7,749,000
Deferred Tax Liabilities:
Excess of tax over book depreciation....... (87,000) (114,000)
-------------------------
Net Deferred Tax Assets...................... 7,297,000 7,635,000
Less Valuation Allowance..................... (7,184,000) (7,505,000)
-------------------------
NET DEFERRED TAX ASSETS...................... $ 113,000 $ 130,000
=========================
A reconciliation of the federal tax rate to the Company's effective tax rate
for fiscal 1997, 1996 and 1995 are as follows:
% of Pretax Income
1997 1996 1995
Federal income tax at statutory rate on loss before taxes.... 35.0% 35.0% 35.0%
Reductions and adjustments of the valuation allowance........ (28.6) (27.4) (35.0)
-----------------------
Effective income tax rate................................... 6.4% 7.6% 0%
=======================
Changes in the valuation allowance are due to expiration of net operating
loss carryforward, tax credit carryovers and the estimated future
realization of their tax benefits. The reduction of these tax benefits are
reflected in these financial statements as an income tax expense.
For income tax purposes the Company has unused Federal operating loss
carryforwards of $16,581,000 expiring through 2012 and State operating loss
carryforwards of $12,221,000 expiring through 2002.
In addition to the loss carryforwards the Company has research and
development and investment tax credit carryovers of $54,000 and $214,000,
respectively, through 2001 which are available to reduce future tax
liabilities.
The realization of the net deferred tax asset of $113,000 is dependent on
the Company's ability to generate sufficient taxable income in the future.
The Company's expectation about realization of deferred assets could change
if near-term estimates of future taxable income during the carryforward
period are reduced.
13. BENEFIT PLANS
The Company has a 401(k) Savings Plan whereby employees may voluntarily
defer a portion of their compensation and the Company matches a portion of
the employee deferral. All employees with at least one year of continuous
service are eligible for the savings plan. Company contributions vest 100%
after five years. The Company has made no contributions to this savings plan
in each of the three years ended September 30, 1997.
The Company also has a retirement plan for certain senior executives. The
benefits payable under this retirement plan are based upon a formula which
allows for the offset of benefits under other offered retirement plans and
Social Security benefits. At September 30, 1997, the unfunded benefit
obligation of this retirement plan was approximately $331,000. The Company
has made no contributions to this retirement plan in each of the three years
ended September 30, 1997.
14. COMMITMENTS AND CONTINGENCIES
The Company was obligated at September 30, 1997 under certain operating
leases for various types of equipment and the Company's operating facility.
The lease for the operating facility expires in September 2000. Rental
expense for fiscal 1997, 1996 and 1995 was $366,000, $420,000 and $450,000,
respectively. The future minimum lease commitments total $972,000 as
follows: $333,000 in fiscal 1998, $323,000 in 1999, and $316,000 in 2000.
Commitments for the purchase of capital expenditures at September 30, 1997
totaled $20,000.
In January 1991, the California Department of Health Services (DHS) issued a
Corrective Action Order (CAO) against the Company and a former subsidiary
The CAO requires the Company and a former subsidiary to comply with a
Cleanup and Abatement Order which had been issued in 1990 against the
Company for soil contamination at the site of the former subsidiary. To
date, no determination has been made with regard to the extent of any
environmental damage and who may be liable. The Company does not believe,
based on the information available at this time, that the outcome of this
matter will have a material adverse effect on its financial position or
results of operations.
15. CAPITAL LEASE
In February 1997, the Company financed approximately $57,000 of leasehold
improvements under a 3 year lease financing agreement with a finance
company. This lease arrangement has been accounted for as a financing
transaction. The subject leasehold improvements are recorded as an asset for
financial statement purposes and are being depreciated accordingly. The
future minimum lease payments under this capital lease are as follows:
1998............................ $ 24,000
1999............................ 24,000
2000............................ 10,000
--------
58,000
Imputed interest............... (10,000)
--------
Capital lease obligation ....... $ 48,000
========
16. RELATED PARTY TRANSACTIONS
The Company paid $60,000 for legal services in each of the years ended
September 30, 1997, 1996 and 1995 to a law firm to which a Director of the
Company is a member.
As further described in footnote 10 the Company has a $7,000,000 line of
credit arrangement from a realty trust operated for the benefit of the
Company's principal shareholders.
17. UNUSUAL ITEM
In fiscal 1989 the Company sold one of its wholly owned subsidiaries and
pursuant to the sales agreement, the Company would receive an additional
payment of $450,000 if this subsidiary was subsequently resold. In the
fourth quarter of fiscal 1997 the former subsidiary was resold and the
Company received $450,000 in cash and has recognized this gain as an unusual
item in the accompanying Statement of Operations.
18. BUSINESS SEGMENT INFORMATION
The Company operates principally in two segments, the Consumer Products
segment and the Industrial Products segment. Operations in the Consumer
Products segment involve the manufacture and distribution of Flowtron
leaf-eaters, bugkillers, yard carts, storage sheds and dog houses which
comprised 97% and 94% of the Company's sales for the years ended September
30, 1997 and 1996, respectively. The Company distributes its consumer
products primarily to major retailers throughout the United States, with
some products distributed under customer labels. Substantially all of this
segment's sales and accounts receivable related to business activities with
such retailers.
The Industrial Products segment markets electronic obstacle avoidance
systems for transportation and automotive applications. Production of
these systems began in fiscal 1996.
There are no intercompany sales between segments.
Operating profit is total revenue less operating expenses excluding interest
expense, general corporate expenses and income taxes. Identifiable assets
by industry segment are those assets that are identified in the operation of
each of the Company's segments. Corporate assets are principally cash and
other assets.
For the Years Ended September 30,
1997 1996 1995
Net sales to unaffiliated customers:
Consumer Products.................. $12,898,000 $12,910,000 $11,920,000
Industrial Productys............... 416,000 840,000 97,000
----------------------------------------
Total net sales.................. $13,314,000 $13,750,000 $12,017,000
========================================
Operating profit (loss)
Consumer Products.................. $ 631,000 $ 750,000 $ (25,000)
Industrial Products................ (244,000) 29,000 (410,000)
----------------------------------------
387,000 779,000 (435,000)
General corporate expenses........... $ (631,000) $ (770,000) $ (724,000)
----------------------------------------
Consolidated operating loss.......... $ (244,000) $ 9,000 $(1,159,000)
Interest expense..................... (535,000) (529,000) (529,000)
Interest income...................... 62,000 57,000 72,000
Unusual item......................... 450,000 -- --
Other income (expense)............... (2,000) 3,000 59,000
----------------------------------------
Loss before income taxes............. $ (269,000) $ (460,000) $(1,557,000)
========================================
Identifiable assets:
Consumer Products.................. $ 5,637,000 $ 5,244,000 $ 5,766,000
Industrial Products................ 330,000 282,000 61,000
Corporate.......................... 1,297,000 1,949,000 1,429,000
----------------------------------------
Total assets..................... $ 7,264,000 $ 7,475,000 $ 7,256,000
========================================
Depreciation:
Consumer Products.................. $ 301,000 $ 359,000 $ 422,000
Industrial Products................ 5,000 4,000 4,000
Corporate.......................... -- -- --
----------------------------------------
Total depreciation............... $ 306,000 $ 363,000 $ 426,000
========================================
Capital expenditures:
Consumer Products.................. $ 277,000 $ 40,000 $ 780,000
Industrial Products................ 2,000 10,000 --
----------------------------------------
Total capital expenditures....... $ 279,000 $ 50,000 $ 780,000
========================================
REPORT OF INDEPENDENT ACCOUNTANTS
Stockholders and Directors of Armatron International, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Armatron
International, Inc. and Subsidiary as of September 30, 1997 and 1996, and the
related consolidated statements of operations, cash flows and stockholders'
equity (deficiency), for the years ended September 30, 1997, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of Armatron
International, Inc. and Subsidiary as of September 30, 1997 and 1996 and the
results of its operations and its cash flows for the years ended September 30,
1997, 1996 and 1995, in conformity with generally accepted accounting
principles.
/s/ R.J. GOLD & COMPANY, P.C.
R.J. Gold & Company, P.C
Needham, Massachusetts
November 26, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company operates principally in two segments, the Consumer Products segment
and the Industrial Products segment. Operations in the Consumer Products
segment involve the manufacture and distribution of Flowtron leaf-eaters,
bugkillers, yard carts, storage sheds and dog houses which comprised 97% and
94% of the Company's sales during the years ended September 30, 1997 and 1996,
respectively. The Company distributes its consumer products primarily to major
retailers throughout the United States, with some products distributed under
customer labels. Substantially all of this segment's sales and accounts
receivable related to business activities with such retailers. The Industrial
Products segment markets electronic obstacle avoidance systems for
transportation and automotive applications. Production of these systems began
in fiscal 1996. There are no intercompany sales between segments. For the year
ended September 30, 1997, two customers accounted for 42% of the Company's net
sales. At September 30, 1997, these customers accounted for 57% of the
Company's trade accounts receivable balance. If any of the Company's major
customers fail to pay the Company on a timely basis, it could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company currently purchases its plastic storage sheds, yard
carts and dog houses from one supplier. This supplier manufactures these
products in accordance with the Company's designs and specifications. The
Company believes that other suppliers could provide the required products
although comparable terms may not be realized. A change in suppliers could
cause a delay in scheduled deliveries of the products to the Company's
customers and a possible loss of revenue, which would adversely affect the
Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for operating expenses, including
labor costs, raw material purchase and funding of accounts receivable.
Historically, the Company's sources of cash have been borrowings from banks and
finance companies and notes from related parties.
During the year ended September 30, 1997, operating activities used $944,000 in
cash primarily due to an increase in trade accounts receivable of $208,000, an
increase in inventories of $362,000 and a decrease in accounts payable of
$476,000.
The Company has a $3,500,000 revolving line of credit agreement with commercial
finance company. This credit agreement is collateralized by all assets of the
Company and expires in December 1999. The terms of this agreement include a
borrowing limit which fluctuates depending on the levels of accounts receivable
and inventory which collateralize the borrowings. The agreement contains
various covenants pertaining to maintenance of working capital, net worth and
other conditions. Interest on amounts outstanding is payable at 1 3/4% over the
commercial base rate. The commercial base rate was 8.5% at September 30, 1997.
At September 30, 1997, the Company had outstanding letters of credit amounting
to $175,000 and approximately $2,359,000 was available, pursuant to the
borrowing formula, under this credit agreement.
The Company has a $7,000,00 line of credit with a realty trust operated for the
benefit of the Company's principal shareholders. This line of credit, with
interest at 10%, requires monthly payments of interest only, and is
collateralized by all assets of the Company. In August 1997, the Company
renewed this line of credit with the realty trust under the same terms and
conditions and extended the maturity date to October 1, 1998. The Company had
$4,715,000 outstanding under this line of credit at September 30, 1997 and
1996. Repayment of this line of credit is subordinate to the repayment of any
and all balances outstanding on the revolving line of credit from a commercial
finance company. At September 30, 1997, interest payments of $917,000
associated with this line were in arrears for the period November 1, 1995 to
September 30, 1997. On November 26, 1997, the Company received a waiver for the
covenant violation related to the interest payments. The period of this waiver
extends through October 1, 1998.
Sales terms for the Industrial Products segment are 30 days net. Following
industry trade practice, the Consumer Products segment offers extended payment
terms for delivery of seasonal product items such as bugkillers, electric
leaf-eaters, biomisters, compost bins, yard carts and storage sheds, resulting
in fluctuating requirements for working capital.
During the year ended September 30, 1997, the Company made cash investments of
$222,000 in capital expenditures primarily for tooling and dies used in
production and financed approximately $57,000 of leasehold improvements. As of
September 30, 1997, the Company had commitments of approximately $20,000 for
future capital expenditures.
In January 1991, the California Department of Health Services (DHS) issued a
Corrective Action Order (CAO) against the Company and a former subsidiary. The
CAO requires the Company and a former subsidiary to comply with a Cleanup and
Abatement Order which had been issued in 1990 against the Company for soil
contamination at the site of the former subsidiary. To date, no determination
has been made with regard to the extent of any environmental damage and who may
be liable. The Company does not believe, based on the information available at
this time, that the outcome of this matter will have a material adverse effect
on its financial position or results of operation.
Management is of the opinion that, unless there is a significant rise in
interest rates, inflation will not be an important factor in fiscal 1998.
The Company believes that its present working capital, credit arrangements with
a commercial finance company and related party, and other sources of financing
will be sufficient to finance its seasonal borrowing needs, operations and
investment in capital expenditures in fiscal 1998. Other sources of financing,
provided by the Company's principal stockholder, are available to finance any
working capital deficiencies.
RESULTS OF OPERATIONS
Year ended September 30, 1997
The results of consolidated operations for the year ended September 30, 1997
resulted in a net loss of $286,000, or $.12 per share, as compared with a net
loss of $495,000, or $.20 per share for fiscal 1996. Sales decreased $436,000,
or 3.2%, to $13,314,000 for the year ended September 30, 1997, as compared to
sales of $13,750,000 for the year ended September 30, 1996. The decrease in
sales was primarily due to a decrease in sales volume of the Industrial
Products segment.
Sales and operating profit for the Consumer Products segment for the year ended
September 30, 1997 were approximately $12,898,000 and $631,000, respectively,
as compared to sales of $12,910,000 and an operating profit of $750,000 for the
year ended September 30, 1996. The decrease in operating profit was primarily
due to underutilization of this segment's facilities.
Sales for the Industrial Products segment for the year ended September 30, 1997
were approximately $416,000 and its operating loss was $244,000 for the year
ended September 30, 1997, as compared to sales of $840,000 and an operating
profit of $29,000 for the year ended September 30, 1996. The decrease in sales
was primarily due to a customer delaying shipments of the Company's obstacle
avoidance systems while it tested and evaluated the Company's systems for a
period of six months. This customer, a major express mail and delivery service
company, completed its testing in July 1997 and has determined that the
Company's obstacle avoidance systems will be placed on each of its newly
acquired delivery vehicles as they are placed in service. The decrease in
operating profit was primarily due to the decreased sales and the
underutilization of this segment's facilities.
Selling, general and administrative expenses decreased $133,000, or 5.1%, to
$2,492,000 for the year ended September 30, 1997, as compared to $2,625,000 for
the year ended September 30, 1996. As a percentage of sales, selling, general
and administrative expenses were 18.7% in fiscal 1997 as compared to 19.1% in
fiscal 1996. The decrease was due to the Company's continuing efforts to
contain costs.
In fiscal 1989 the Company sold one of its wholly owned subsidiaries and
pursuant to the sales agreement, the Company would receive an additional
payment of $450,000 if this subsidiary was subsequently resold. In the fourth
quarter of fiscal 1997 the former subsidiary was resold and the Company
received $450,000 in cash and has recognized this gain as an unusual item.
Additional tax benefits from losses on operations for the year ended September
30, 1997 were offset by changes to the related valuation allowance.
Year ended September 30, 1996
The results of consolidated operations for the year ended September 30, 1996
resulted in a net loss of $495,000, or $.20 per share, as compared with a net
loss of $1,557,000, or $.63 per share for fiscal 1995. Sales increased
$1,733,000, or 14.4%, to $13,750,000 for the year ended September 30, 1996, as
compared to sales of $12,017,000 for the year ended September 30, 1995. The
increase in sales was primarily attributable to a 10% increase in sales volume
and a 4% increase in the average selling price of the Company's products.
Sales and operating profit for the Consumer Products segment for the year ended
September 30, 1996 were approximately $12,910,000 and $750,000, respectively,
as compared to sales of $11,920,000 and an operating loss of $25,000 for the
year ended September 30, 1995. The increase in operating profit was
attributable to lower operating expenses due to the Company's cost containment
efforts.
Sales for the Industrial Products segment for the year ended September 30, 1996
were approximately $840,000 and had an operating profit of $29,000 for the year
ended September 30, 1996, as compared to sales of $97,000 and an operating loss
of $410,000 for the year ended September 30, 1995. The increase in sales was
due to a customer rescheduling and delaying of shipments of the Company's
systems. The operating profit was primarily due to increased sales volume of
the Company's systems.
Selling, general and administrative expenses decreased $84,000, or 3.3%, to
$2,625,000 for the year ended September 30, 1996, as compared to $2,541,000 for
the year ended September 30, 1995. As a percentage of sales, selling, general
and administrative expenses were 19.1% in fiscal 1996 as compared to 21.1% in
fiscal 1995. The decrease was due to the Company's continuing efforts to
contain costs.
Additional tax benefits from losses on operations for the year ended September
30, 1996 were offset by changes to the related valuation allowance.
The Company believes inflation did not have a material effect on its results of
operations for fiscal 1997, 1996 or 1995.
FIVE-YEAR FINANCIAL SUMMARY
SELECTED FINANCIAL DATA:
Years Ended September 30,
1997 1996 1995 1994 1993
(in thousands, except per share data)
Net Sales.................................... $ 13,314 $ 13,750 $ 12,017 $ 13,286 $ 16,174
Operating Income (Loss)...................... $ (244) $ 9 $ (1,159) $ (934) $ (1,106)
Net Loss..................................... $ (286) $ (495) $ (1,557) $ (1,212) $ (1,548)
Earnings (Loss) Per Share of Common Stock:
Net Loss................................... $ (.12) $ (.20) $ (.63) $ (.49) $ (.63)
========================================================
Total Assets................................. $ 7,264 $ 7,475 $ 7,256 $ 9,599 $ 10,398
Long-Term Obligations........................ $ 4,745 $ 4,715 $ 4,715 $ 5,140 $ 5,251
There were no dividends paid on common shares during any of the above years.
Under the financing agreement, as set forth in footnote 10 to the company's
financial statements the Company is restricted from paying dividends for the
term of that agreement.
- -------------------------------------------------------------------------------
Common Stock Information:
The approximate number of shareholders of record at December 1, 1997 was 1,093.
The following table indicates the fiscal quarterly high and low prices for the
Company's common stock and the high and low bid prices as reported in Over the
Counter Bulletin Board for 1997 and 1996:
1997 1996
Fiscal Quarter High Low High Low
First................... 3/4 3/8 11/16 7/16
Second.................. 2 7/8 1/4 11/16 1/4
Third................... 2 1/4 1/4 2 7/8 1/4
Fourth.................. 15/16 5/16 1 1/8 5/8
BOARD OF DIRECTORS
Charles J. Housman
President, Treasurer & Chairman of the Board
Edward L. Housman
President, Automatic Radio International
Elliot J. Englander
Member, Englander, Finks, Ross, Cohen & Brander, P.C.
Attorneys at Law
OFFICERS
Charles J. Housman, President, Treasurer
Sal DeYoreo, Vice President
Elliot J. Englander, Clerk
AUDITORS
R. J. Gold & Company, P.C.
GENERAL COUNSEL
Englander, Finks, Ross, Cohen & Brander, P.C.
TRANSFER AGENT
American Stock Transfer & Trust Co.
STOCK TRADING
Over the Counter Bulletin Board
FORM 10-K
A copy of the Company's Fiscal 1997 Annual Report on Form 10-K to the
Securities and Exchange Commission is available to Stockholders, without
charge, upon written request to the Company:
Armatron International, Inc.
Two Main Street
Melrose, MA 02176
/
/ ARMATRON
-------------------
INTERNATIONAL INC.